Have you ever invested heavily in a new market segment, only to be disappointed by the results? Or perhaps a product feature you thought would be perfect for a specific industry didn't gain the traction you anticipated? These experiences highlight the importance of accurate market analysis in the ever-changing world of B2B.
This is where market sizing comes in as your strategic guide. By understanding the true size and potential of a market, you can make data-driven decisions about where to focus resources, product expansion, and how best to maximize your investments.
At the core of market sizing are the interconnected metrics of Total Addressable Market (TAM), Serviceable Addressable Market (SAM), and Serviceable Obtainable Market (SOM). Think of them as a roadmap, taking you from the broadest market potential (TAM), down to your target market (SAM), and down further to the realistic, achievable market share for your business (SOM).
In this blog, we'll break down TAM, SAM, and SOM in an easy-to-understand way. Our goal is to give you a step-by-step guide for calculating these metrics, complete with practical examples. Understanding these concepts will empower you to make confident, strategic decisions for B2B growth.
Understanding the size and potential of your market is crucial for any business, but it's especially vital in the B2B space where investments are significant and the sales cycles can be complex. Here's how proper market sizing can profoundly impact your business strategy and operational efficiency:
Now that we've explored the powerful benefits of market sizing for B2B success, let's delve into the first metric, TAM. Understanding your TAM provides the foundation for calculating the specific market segments you can realistically reach and conquer.
Imagine capturing 100% of your market with zero competition. This ideal scenario is the theoretical idea behind the Total Addressable Market (TAM)–the ultimate revenue potential if your business monopolized the market. This concept serves as the full demand potential for your products or services.
For B2B companies, understanding TAM is essential for strategic planning. It provides a macro-level view of market potential, guiding investment decisions, resource allocation, and product development. TAM analysis reveals opportunities for businesses to identify and prioritize potential markets, set realistic revenue goals, and gauge long-term growth opportunities.
There are two main methodologies for calculating TAM:
Each has its merits, and a savvy approach often involves leveraging both to cross-validate the market potential.
Ready to transition from broad market potential to the segments where your efforts will have the greatest impact? That's where the Serviceable Addressable Market (SAM) becomes essential. SAM narrows down your TAM to the market segments that your product or service can actually serve with with your current sales team, distribution channels, and geographic reach.
While TAM provides an overview of the full market potential, SAM focuses on the segments that are realistically accessible based on your business model. This distinction is crucial—it ensures your strategies are aligned with feasible opportunities and current market limitations.
Defining your Ideal Customer Profile (ICP) helps identify the most promising market segments within your SAM. This alignment benefits sales and marketing efforts in several ways:
To learn more about tailoring your marketing to these high-value accounts, check out our blog, The Essential Guide to Account-Based Marketing: Empower Your Go-To-Market Team for Success.
Calculating your SAM pinpoints the most promising portion of the TAM, allowing you to focus resources on high-potential opportunities. Like TAM, there are two main approaches to calculate SAM:
By applying both the top-down and bottom-up approaches to calculate SAM, businesses can gain a comprehensive understanding of their accessible marketand can cross-check their results for greater accuracy. This empowers them to tailor their strategies and focus on the most relevant and reachable segments.
After identifying your SAM, it's time to determine the portion you can realistically capture by calculating your Serviceable Obtainable Market (SOM). SOM represents the specific share of the SAM that your business can realistically secure, considering practical limitations within the SAM, such as established competitors, resource constraints, and evolving customer needs.
Calculating SOM is crucial for setting attainable goals and developing data-driven strategies. It acknowledges the constraints that may affect your reach within the SAM.
Calculating your SOM pinpoints the realistic portion of the market your business can expect to capture. This involves understanding your company's capabilities and its competitive environment. Here’s how you can approach the calculation from both a top-down and bottom-up perspective:
Both top-down and bottom-up approaches offer valuable insights into your SOM, but each has a different starting point. The top-down method provides a macro-level estimate based on your desired market share aspirations. In contrast, the bottom-up approach gives a more granular, customer-focused projection.
By comparing the results from both methods, you gain a comprehensive understanding of your business's potential market reach and set realistic growth targets.
Intent data can significantly refine your approach to calculating SAM and SOM by revealing which segments of the market are most engaged with your product categories. To enhance your targeting strategies by understanding potential customer behaviors, check out our blog, The Essential Guide to Intent Data: Leveraging Signals to Increase Revenue.
Phew! Congrats on making it this far. We know those concepts were a lot to digest – but hang in there, because this is where it all starts to come together. Let's make things a bit more relatable with a practical example – this time, featuring a hypothetical B2B company called "Amplify."
Amplify offers a cloud-based social media management platform designed specifically for enterprise marketing teams looking to streamline and optimize their social presence. To gain a complete understanding of their market potential, Amplify will utilize both top-down and bottom-up approaches to calculate TAM, SAM, and SOM.
With so many enterprise teams worldwide struggling to manage their social presence effectively, how does Amplify determine where to focus its sales and marketing efforts? Calculating its Total Addressable Market (TAM) is a crucial first step in identifying the full scope of its potential. This calculation shapes the company's business strategies, informing decisions like setting sales targets, allocating marketing budgets, and prioritizing product features tailored to the most promising market segments. However, it’s important to remember that TAM offers a broad view of potential, not a guarantee of immediate sales.
A top-down analysis starts broad, assessing the total market size before focusing on Amplify's position within it. For Amplify, finding the total market size means looking at the global enterprise software market for social media management, which, according to recent industry reports that Amplify consulted, stands at $10 billion.
Amplify targets enterprise-level businesses (1000+ employees), a segment estimated to represent roughly 15% of this overall market. Enterprises ooften struggles with ensuring consistent brand messaging and effective collaboration across widespread teams, which are challenges Amplify's platform directly addresses.The table below shows the calculation.
This figure represents the broad revenue potential from all enterprise teams globally, assuming they all choose Amplify's platform.
The bottom-up analysis builds the TAM estimate from specific data points close to Amplify's operations. If research reveals an estimated 50,000 enterprise-level businesses in the global market, and Amplify projects an average annual revenue of $20,000 per enterprise customer, the calculation is as follows:
This figure represents the total annual revenue potential for Amplify if every identified enterprise-level business becomes a customer.
The difference in the TAM between the top-down and bottom-up methods highlights the variation in market perspective. The top-down approach offers a broader, more optimistic market potential, while the bottom-up approach provides a more detailed and perhaps more realistic market insight based on direct customer and pricing data.
Both are useful for understanding different facets of market potential and can guide strategic decisions in targeting market segments and allocating marketing resources. Balancing these figures helps Amplify navigate between long-term strategy and short-term objectives.
Now let's look at the Serviceable Available Market (SAM) for Amplify. This represents the portion the TAM that Ampligy can realistically serve given its current capabilities and go-to-market strategy. This focused figure is essential for operational planning, specifically targeting marketing efforts and customizing product offerings to meet the needs of this segment.
The top-down method for calculating SAM starts with the TAM derived from the top-down approach and then narrows it down to the segment of that market that Amplify can realistically capture. As calculated previously, the TAM for Amplify using the top-down method is approximately $1.5 billion. Amplify targets a specific market segment within this broad TAM, which includes large enterprises that require sophisticated tools to manage their global social media strategies. Market research indicates that this segment accounts for about 20% of the broader enterprise market (TAM).
By applying these parameters, Amplify's SAM using the top-down approach is calculated as:
This figure reflects the part of the market that Amplify aims to capture with its cloud-based platform, tailored to meet the sophisticated requirements of enterprises that need tools to manage their global social media strategies.
The bottom-up approach for determining Amplify's SAM provides a granular perspective on their market potential, focusing on real-world customer interactions and industry trends.
By analyzing various data sources including industry type, company size, and specific challenges, Amplify estimates that approximately 30% of the 50,000 global enterprises fit their refined target segment, resulting in an initial pool of 15,000 potential customers. This determination is based on detailed market analysis, including industry reports, competitor positioning, and direct feedback from sales and marketing teams.
To further define their most promising potential customers, Amplify then considers how well these potential customers align with their ICP. They determine that roughly 50% of these large enterprises, specifically those struggling with brand consistency across multiple social accounts in diverse global markets, are the ideal fit. This results in 7500 potential customers (15,000 x 50% = 7500 businesses).
The following calculation details how Amplify applies the bottom-up approach to determine its SAM, assuming the same average annual revenue per customer as identified in the TAM calculation ($20,000):
This calculation aims to estimate the potential annual revenue that these 7,500 enterprises could generate, assuming each becomes a customer within the year.
Amplify's strategic planning incorporates both the ambitious $300 million top-down SOM and the more grounded $150 million bottom-up SOM. This dual perspective ensures that Amplify is prepared for both expansive growth and realistic sales achievements.
Now that Amplify knows its SAM, how much can it realistically achieve? Calculating the Serviceable Obtainable Market (SOM) will provide the answer.
Understanding what Amplify can realistically achieve in the market is crucial, given the competitive nature of the industry. SOM focuses on the realistic market share Amplify can capture considering both market competition and internal capabilities.
Using the top-down approach, Amplify starts with its SAM and applies a desired market share percentage to forecast the obtainable market. This method provides an estimate based on industry averages and overall market dynamics.
Amplify faces stiff competition from both established players and niche solutions specializing in specific social media platforms. By leveraging unique product features and an experienced team, Amplify aims to secure a 10% market share within their SAM, which was previous calculated as $300 million. This target is aligned with strategic business objectives and reflects an ambitious yet attainable vision for Amplify's market share.
The table below details the calculation of the SOM using the top-down approach.
This figure reflects an ambitious yet attainable vision for Amplify's market share, considering broader market trends and its competitive positioning.
Transitioning from the theoretical to the tangible, the bottom-up approach to SOM provides a realistic view of Amplify's achievable market share based on its ICP and direct sales capabilities. It focuses on customers they have the resources to reach, are most likely to convert, and can retain over time. This approach considers factors like the competitive landscape, marketing capabilities, conversion rates, and potential churn.
After evaluating these factors, Amplify estimates that it can realistically convert 10% of its ICP-aligned enterprises (which the SAM analysis identified as 7500 target customers). This conversion belief is based on Amplify's strong track record with similar clients and recent investments in its sales team. This equates to approximately 750 potential customers. Keeping consistent with previous calculations, we maintain the same average annual revenue per customer, which is $20,000. The SOM, using a bottom-up approach, is calculated as follows:
This estimate is based on a realistic assessment of the number of target customers Amplify can convert and successfully serve within the next fiscal year, taking into account its current sales effectiveness and market reach.
Both approaches to calculating SOM provide valuable insights for Amplify. The top-down estimate ($30 million) offers a broad view of potential market success, while the bottom-up estimate ($15 million) presents a more focused and perhaps conservative view, heavily reliant on current customer engagement and conversion metrics. These estimates help Amplify align its strategic goals with realistic market opportunities. Regularly updating both SOM estimates is essential as market conditions and their own capabilities evolve.
The table below provides a clear summary of Amplify's market potential, detailing TAM, SAM, and SOM calculations. With these insights, Amplify is well-positioned to fully realize its potential within the dynamic enterprise social media management market.
Here are the key strategic lessons we can learn from Amplify's market sizing approach:
Remember, these calculations aren't just theoretical exercises. They represent a foundational roadmap for Amplify's strategic planning. Every decision, from budgeting to marketing campaigns, should align with the company's potential to capture and grow within its target market.
That was a lot to take in, but investing the time to understand these frameworks is crucial for strategizing and driving growth in your B2B endeavors.
Think of TAM, SAM, and SOM as your roadmap to success. They offer a clear path from broad market potential down to the specific segments where you can make the greatest impact. This understanding empowers you to:
Market sizing gives you the confidence to make strategic moves within the ever-changing B2B landscape. Whether you want to strengthen your marketing, optimize resources, or gain a competitive edge, these techniques are essential tools for driving lasting success.
Have questions about market sizing? Here are answers to some of the most frequently asked questions.
Understanding TAM, SAM, and SOM provides a framework to identify the total market demand, target the right customers, and set realistic growth expectations. This insight is invaluable for crafting a focused business strategy, optimizing marketing plans, and demonstrating potential to investors. For instance, if TAM analysis reveals a growing market for eco-friendly products, a new e-commerce business can tailor its offerings to meet this demand.
To calculate market size for your local e-commerce business, start with market research tools that provide dynamic market insights and historical data. Focus on specific market segments and potential new customers within your local area to estimate the market size based on annual revenue potential. This approach ensures your calculation aligns with the unique characteristics of your local market.
Calculating your SOM provides a data-driven estimate of the achievable market share. This allows you to set realistic growth goals for your first year, avoiding overly optimistic projections that could jeopardize your long-term success.
Investors want to see evidence of a clear market opportunity. By demonstrating that you've thoroughly analyzed your TAM, SAM, and SOM, you show that your business plan is based on data-driven insights, not just assumptions. This increases investor confidence in your company's potential.
Historical data and financial reports provide a basis for analyzing market trends, understanding industry cycles, and identifying growth patterns. While this information alone cannot directly predict a new company's maximum market value, it offers valuable insights into potential growth trajectories and market opportunities that can inform valuation estimates.
Ready to turn market potential into revenue? The Sona Growth Platform helps go-to-market teams to identify, assess, and prioritize leads to ensure they fit their ICP. Leverage first-party data to maximize your market share, and prioritize your efforts to maximize ROI using our robust segmentation tools.
Don't leave growth up to chance – unlock the full power of your data with Sona. Contact us today for a personalized demo!
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